Participant is Physician, non-Partner. Can Firm Take ER Contributions from Compensation?

If a participant works as a physician in a medical office and he/she is not a partner, can the firm require that the ER safe harbor match and profit sharing reduces the W-2 compensation of the participant? Would the answer change if it is a safe harbor non-elective? The firm is not related to any government entity. To be clear, this provision is written in the employment contract, not in the plan document. 

This seems like a blatant attempt to either: 1. circumvent 402(g) limits, or 2. find a way to make employees pay for ER contributions. Participants would be less likely to make deferrals if they knew the related match would come directly from their paycheck. 

That would be more of an employment agreement issue.  It is common for physicians in a group to be charged with all expenses related to their benefits package.  I've had the same concern that this may in fact make an otherwise employer contribution into a CODA with the inherent problems that flow from that, but I think if the employment agreement is appropriately written (BY AN ATTORNEY WHO KNOWS WHAT THEY ARE DOING), the employee/physicians "compensation" can be defined to be x minus y, where y is the costs associated with the benefits attributable to them.  When too much "choice" is given to the physician is when you run into trouble (i.e. if the physician can "decline" a profit sharing contribution - then to me it looks like a CODA, smells like a CODA, and walks like a CODA ...).

I agree with MoJo that it is a very tight line.  Employer Contributions are paid directly from the company.  So are employee salaries.  So, you're basically saying that the employer is making a decision to pay more in employer contributions and less in salary to the participant.  The key is the elimination of "choice" by the participant; which is exactly what MoJo said.  

Good Luck!

The plan I'm referring to has a safe harbor match. The participant can either defer part of their salary and have part of their compensation reduced by the accompanying safe harbor matching contribution, or they can choose to defer nothing. 

It seems strange to me that this would be allowed. I assume any company could start putting this in employment agreements as a way to bypass a required obligation. For example, I offer a safe harbor match to my employees. If I added this to my employee contracts, I'm certain no one would defer, based on the current participation rates. As the owner, I would be creating a plan where I can indirectly bypass the safe harbor requirements, fund a full match and 401(k) for myself, and my employees would receive nothing. 

You can, as part of an employment agreement which defines the total compensation package, provide that a person's base pay is permanently reduced by X amount which will be contributed as an employer contribution on the employee's behalf. Like plans that require employees to contribute as a condition of employment - the amounts do not count as deferrals. 

However, providing annual discretion - which if you do with matching contributions that indirectly provides discretion - then I think you have a CODA instead. Unless with a match the maximum is assumed and "charged" whether he gets it or not.

Much easier to defend at the start of employment (or plan) - the total compensation package is X and it is comprised of base pay A, retirement plan contributions B and H&W benefits C plus whatever incentive pay is earned. If there's a waiting period then define up front these components before and after, because doing it only when the person becomes eligible looks more CODA again.

Of course, if someone takes a lower comp because of these "employer provided" contributions that are subject to a vesting schedule - that's another complication.

In summary: defining the total compensation package by component in employment agreement at employment commencement - good - reducing a participant's pay arbitrarily to pay for his matching contributions - bad.

The match in such a situation is clearly a disguised CODA. They're trying to get the benefit of 402(g)(8) without making the individual a K-1 partner. 402(g)(8) does not apply to W-2 employees. Nonelective is OK, if truly uniform/nonelective, because then the employee has no choice between contribution vs. taxable cash. However, would need to be disclosed up front so as to be part of employment contract, otherwise employee can complain underpaid.

What does the plan document say computing the SH match and profit sharing contributions? I'll guess it doesn't talk about using the definition of compensation you have noted.

Probably the plan refers to computing everything based on W-2 comp, which requires a circular calculation, but is otherwise a self-fulfilling prophecy. The numbers all work out, but in the end the doc had a choice with respect to the match of taking cash or contributions. Say the match is dollar for dollar on first 4% of comp and doc makes $200k. If he/she defers $10k, then he/she gets final W-2 taxable (and current cash) of around $182k ($200k - $10k deferral - $8k match) (I'm ignoring the circularity of the 4% of comp calc for simplicity's sake). If he she defers $5k, then he/she gets $190k current W-2 comp ($200k - $5k deferral -$5k match). So in Case A, current comp was $182k, in Case B, $190k, an $8k swing. $5k of the $8k is attributable to the different elective deferral contribution, so OK, but the other $3k is attributable to the disguised CODA that results from the employer's reducing the W-2 employee's current pay by the cost of the match.